Government seems set on limiting the offset of assessed losses against current income despite the devastating impact of Covid-19 trading restrictions and violence and looting that left businesses kneecapped.
National Treasury wants to limit the offset of assessed losses carried forward to 80% of the taxable income in each subsequent year. The proposal was first mentioned in the 2020 Budget and has now been published in the July Draft Taxation Laws Amendment Bill.
While a trade-off between limiting losses and lower rates can be justified, the South African Institute of Taxation (Sait) says it questions the timing of introducing such a limitation given massive losses caused by Covid-19. A one- or two-year delay should be considered once South Africa enters into a genuine recovery phase.
This limitation is, in part, aimed at funding the planned reductions in the corporate tax rate (28%), in line with global trends.
Sait’s corporate tax work group says in a submission to treasury that it understands the basis for the proposed limitation. The trade-off of limiting losses should presumably result in a more reasonable corporate rate of 25% to be worthwhile.
However, it does appear that SA continues to adopt anti-business policies from elsewhere in the world (in the name of anti-avoidance) which favour the fiscus whilst failing to adopt taxpayer or business friendly policies that the other countries do adopt.
Sait says it does not support a blanket application to all taxpayers. It suggests differential carveouts, with some being total carveouts and others for a limited period. Farming is in most need of a carveout.
Tsanga Mukumba, associate at Cliffe Dekker Hofmeyr, says in a recent tax alert that suffering financial losses is a “near inevitable part” of doing business.
“International and South African tax policy has customarily allowed taxpayers that expend more than they earn to set off these losses against current or future income,” he notes.
“This shields start-up businesses yet to turn a profit and cyclical businesses subject to low income or high expenditure periods from a tax cost until the income earned is deemed sufficient to warrant a tax burden.”
Mukumba says while the proposal does remove some of the shielding provided to taxpayers who have suffered significant assessed losses, it allows the majority of an assessed loss to be used and the balance carried forward to subsequent tax years. “Meaning the full assessed loss may still be utilised, but over a longer period.”
Sait proposes some carveouts for micro enterprises. Industries which experience significant fluctuations over seasons longer than a financial year, which swing between large profits and losses (such as farmers), should be excluded from the rules.
It also refers to start-ups in capital intensive industries with accelerated allowances, such as mining and renewable energy, and companies emerging from business rescue proceedings.
Sait also submits that these provisions should not apply in respect of pre-trade expenditure and consideration should also be given to phasing in the measure to arrive at 80% over time.
Nato Oosthuizen, partner at BDO, says in a strained economy it cannot be beneficial to lower the corporate tax rate by 1% but limit the carry forward of assessed losses and deductibility of interest.
Certain small-, micro- and medium-sized enterprises are already enjoying preferential tax rates (below 28%). The proposed limitation of assessed losses will hurt small businesses without any corresponding benefit.
Oosthuizen also believes that the umbrella approach to limit assessed losses in respect of corporate taxpayers is not the best solution.
Mukumba says it remains to be seen whether corporates and investors value the certainty of a lower corporate income tax rate more than flexibility in the system of taxation.
The flexibility at least takes into account the economic position of businesses that have suffered significant past losses and may yet struggle with cash flow constraints.
In its submission to treasury PwC remarks on the lack of group sharing of losses for larger South African groups. “South Africa is again quick to impose a one-sided set of restrictions from international comparisons without any corresponding (and well-accepted) positive offsets.”